Where did China's luxury shoppers go? Tax crackdown hits Louis Vuitton, Gucci

China's wealthy consumers — long the backbone of global luxury brands such as Louis Vuitton and Gucci — are pulling back on spending as Beijing steps up tax enforcement against those who have parked assets in offshore trusts. The pullback is compounding a slowdown in luxury consumption in the United States, deepening the gloom across the global luxury industry.

According to Reuters, the Chinese government is tightening requirements for wealthy individuals who manage assets through offshore trusts to declare and pay taxes. Those affected must report and settle years of unpaid taxes by Thursday.

The tax rate in question is 20 percent. Wealthy Chinese who had used offshore trusts to reduce their tax burden now face bills covering past income as well.

The move has emerged as yet another headwind for the global luxury industry, which counts Chinese consumers as buyers of roughly 20 percent of all luxury goods worldwide. Before the COVID-19 pandemic, China's expanding consumer class was the primary growth engine of the global luxury market.

What makes this crackdown particularly notable is that it targets ultra-high-net-worth individuals — those who had maintained relatively strong spending power even amid the broader economic slowdown.

China's middle class has already been cutting back for years due to a prolonged slump in the real estate market. The ultra-wealthy had continued buying luxury goods by comparison, but concerns are growing that rising tax burdens could now curb even their spending.

Alexis Bonhomme, managing director of Trinity, a Shanghai-based luxury consultancy, said some people could face liquidity problems ahead of the tax deadline.

"It doesn't mean they won't buy luxury again, but the mood is not there right now," he added.

China's luxury market is already showing signs of strain. Analysis by investment bank Bernstein found that sales growth at shopping malls on the Chinese mainland slowed sharply over the summer.

Two industry insiders interviewed by Reuters said overall trading conditions at Chinese shopping malls were weak in the third quarter of this year, though performance varied by brand.

So-called "quiet luxury" brands — those that avoid prominent logos — held up relatively well. Brunello Cucinelli, known for its high-end cashmere, and Loro Piana were among the standouts.

Traditional luxury houses with high brand visibility, such as Louis Vuitton and Gucci, fared comparatively poorly.

One wealthy Chinese consumer said the tax crackdown was having a greater effect on consumer sentiment than on luxury purchases themselves.

Deng Chi, a 51-year-old Beijing-based exporter of architectural ceramic components, said he plans to cut his luxury spending this year by 20 percent compared with previous years.

"The rich people who have to pay taxes on offshore trusts won't stop buying luxury goods just because they're short tens of thousands of yuan," he said. "The real problem is that these measures undermine everyone's confidence."

He added that he worried attention would soon turn to those who are merely relatively well-off.

The luxury industry's troubles are not confined to China. Spending is also slowing in the United States, the world's largest luxury market.

Credit card data from Citibank showed that US luxury purchases fell 6 percent year-on-year in September. Spending also declined 4 percent in both July and August, marking three consecutive months of contraction.

In the United States, high-income consumers who built wealth through AI-related stock gains had been propping up luxury spending, but analysts say sentiment is now weakening even in that segment.

The simultaneous slump in China and the United States has weighed on luxury stocks. As of Oct. 9, LVMH — the French conglomerate behind Louis Vuitton and Dior — had shed roughly 40 percent of its share price this year, while Hermès was down a similar amount and Kering, the parent of Gucci, had fallen 29 percent, according to Reuters.

The combined market capitalization of 10 major European luxury companies tracked by Reuters has fallen by about $350 billion this year, as investors dumped luxury shares amid fading hopes for a recovery in the global luxury market.

Earnings have confirmed the weakness. In LVMH's third-quarter results, sales in its core fashion and leather goods division fell 5 percent year-on-year — a steeper drop than the 1.8 percent decline the market had expected.

Not all luxury segments are suffering equally, however. High-end jewelry and precious metals have maintained relatively resilient demand.

Richemont, which owns Cartier among other brands, has fared better than most luxury peers, buoyed by wealthy consumers who value gold and precious metals as stores of wealth.

Even as spending on traditional handbags and clothing declines, a shift is emerging toward goods such as gold and jewelry that retain asset value.

With the Chinese tax crackdown and the US spending slowdown hitting simultaneously, luxury companies face a difficult operating environment for the remainder of the year. Earnings reports due Thursday from Kering and Hermès are expected to offer further clues about the depth of the luxury market's downturn.